If you live in the western world you are no doubt experiencing a lot of hysteria about the rising cost of petrol. In Australia vast amounts of parliamentary time have been wasted on debating possible measures that at best will affect the price of petrol by a few cents per litre. The news is full of angst about the cost of filling up.
But, there are many costs of owning a motor car and petrol certainly not the highest part, it could be argued that it is the most "visible" component. The biggest cost is buying the car and the depreciation involved, made even worse if the purchase is financed with borrowed money.
An example
A 2003 Ford Falcon Futura, $35,000 new, resale value $11,000 (at best) in 2008. That's $4,800 (in depreciation) per year, add an additional $1,920 per year if the full purchase amount is borrowed over 5 years at a 10% interest rate. Driving this car 15,000km* per year costs $2,086 in petrol per year at $1.60 per litre (June 2008) if 11.5 litres per 100km is achieved. We'll only get petrol price relief immediately if the car is replaced by something costing no more than what we get if we sell the Falcon.
Let's look at the real cost of replacing this car and assume that petrol is $2.00 per litre, a price that may achieved this year in Australia but still a lot cheaper than in Europe.
If we look at what is most likely to happen, the car is replaced by something that costs more than the resale value of the car it replaces. Suppose the gas guzzler is replaced by a European size sedan with a 2 litre (or smaller) engine. A search around the web finds many second hand cars that are about 2 years old and costing less than $17,000. Using a Ford Focus as an example, this car achieves 7.1litres/100km (combined), 6.8litres/100km on the motorway, saving 4.4 litres per 100km (11.5 - 7.1). This saving has to repay $6,000 and and extra $1,620 (if this money is borrowed over 5 years at 10% interest) before we get ahead, we have to travel about 68,000 km or 86,600km, if borrowing is factored in, at $2 per litre before we start making a saving.
As a slight digression the oil companies are constantly accused of operating a cartel however, petrol retaining in Australia is a highly competitive low margin business. The last inquiry conducted by the Australian Competition and Consumer Commission was conducted in 2007 and no cartel was discovered. Petrol prices rise and fall cyclically, Tuesday (in Brisbane) being the best day to buy petrol; if you don't mind waiting in long queues, burning your potential saving whilst you do (most people seem to be content to idle their engines rather than switching them off whilst waiting). When I was traveling in the USA in 2007 there was a lot of angst as the price of petrol approached US$3 per gallon. Naturally the oil companies were being accused of operating a cartel. The real reason is that no refineries have been built in the USA in the last 30 years and the USA has to import petrol. Why would an oil company spend billions building a refinery when they are able to run the existing refineries at capacity supplying a commodity that is increasing in price? No single oil company is going go out on a limb and put their shareholders at a disadvantage compared to its competitors.
Why I'm not replacing my gas guzzling old car purely to reduce my expenditure on petrol.
I will eventually have to replace my car but it won't be because it uses a lot of petrol. I own a 1986 Ford Fairmont. This car is a classic Australian gas guzzler. I get about 13 litres per 100km (18mpg US, 22mpg UK) for motorway driving. I haven't measured its consumption around town as I do very little of that. From searching around the web it is probably in the region of 16 litres per 100km (15mpg US, 17.5mpg UK). As I have owned this car since 1996 and its yearly depreciation is low and it's residual value is virtually zero. Suppose I replace it with a second hand Ford Focus as above. Firstly, I'd be out of pocket by $17,000 before buying any petrol, it would be even worse if I had to borrow the money (an extra $4,660 at 10% over 5 years). At $2 per litre that amount of money will buy 8,500 litres of petrol; enough to drive my car 53,125 km around town (16l/100km) and I'd need to travel just over 95,500 km to recover this money by reduced fuel consumption. Even if petrol were $3 per litre we'd still looking at a pay back period of that can be measured in years.
I actually do about 14,000 km per year, mostly on motorways so applying the above calculation I'd save about 6.2 litres/100km. I'd have to travel 137,096 km at $2 per litre before I start to break even, nearly 10 years of motoring.
My calculations are quite simplistic and don't take account of inflation. My point is that just buying a car to reduce petrol consumption is actually an expensive thing to do. In my experience cheaper motoring is achieved by buying a good second hand car without borrowing money and keeping it for a long time. If you do the same calculations on a hybrid car you'd probably find it even more expensive, apparently the batteries have to be replaced every 3 years and it costs a lot more than filling your tank.
* This figure comes from a recent article on the opinion page in the Australian on 20/6/2008. The figure is 7,500km per capita per year. I'm assuming 2 adults per car.
But, there are many costs of owning a motor car and petrol certainly not the highest part, it could be argued that it is the most "visible" component. The biggest cost is buying the car and the depreciation involved, made even worse if the purchase is financed with borrowed money.
An example
A 2003 Ford Falcon Futura, $35,000 new, resale value $11,000 (at best) in 2008. That's $4,800 (in depreciation) per year, add an additional $1,920 per year if the full purchase amount is borrowed over 5 years at a 10% interest rate. Driving this car 15,000km* per year costs $2,086 in petrol per year at $1.60 per litre (June 2008) if 11.5 litres per 100km is achieved. We'll only get petrol price relief immediately if the car is replaced by something costing no more than what we get if we sell the Falcon.
Let's look at the real cost of replacing this car and assume that petrol is $2.00 per litre, a price that may achieved this year in Australia but still a lot cheaper than in Europe.
If we look at what is most likely to happen, the car is replaced by something that costs more than the resale value of the car it replaces. Suppose the gas guzzler is replaced by a European size sedan with a 2 litre (or smaller) engine. A search around the web finds many second hand cars that are about 2 years old and costing less than $17,000. Using a Ford Focus as an example, this car achieves 7.1litres/100km (combined), 6.8litres/100km on the motorway, saving 4.4 litres per 100km (11.5 - 7.1). This saving has to repay $6,000 and and extra $1,620 (if this money is borrowed over 5 years at 10% interest) before we get ahead, we have to travel about 68,000 km or 86,600km, if borrowing is factored in, at $2 per litre before we start making a saving.
As a slight digression the oil companies are constantly accused of operating a cartel however, petrol retaining in Australia is a highly competitive low margin business. The last inquiry conducted by the Australian Competition and Consumer Commission was conducted in 2007 and no cartel was discovered. Petrol prices rise and fall cyclically, Tuesday (in Brisbane) being the best day to buy petrol; if you don't mind waiting in long queues, burning your potential saving whilst you do (most people seem to be content to idle their engines rather than switching them off whilst waiting). When I was traveling in the USA in 2007 there was a lot of angst as the price of petrol approached US$3 per gallon. Naturally the oil companies were being accused of operating a cartel. The real reason is that no refineries have been built in the USA in the last 30 years and the USA has to import petrol. Why would an oil company spend billions building a refinery when they are able to run the existing refineries at capacity supplying a commodity that is increasing in price? No single oil company is going go out on a limb and put their shareholders at a disadvantage compared to its competitors.
Why I'm not replacing my gas guzzling old car purely to reduce my expenditure on petrol.
I will eventually have to replace my car but it won't be because it uses a lot of petrol. I own a 1986 Ford Fairmont. This car is a classic Australian gas guzzler. I get about 13 litres per 100km (18mpg US, 22mpg UK) for motorway driving. I haven't measured its consumption around town as I do very little of that. From searching around the web it is probably in the region of 16 litres per 100km (15mpg US, 17.5mpg UK). As I have owned this car since 1996 and its yearly depreciation is low and it's residual value is virtually zero. Suppose I replace it with a second hand Ford Focus as above. Firstly, I'd be out of pocket by $17,000 before buying any petrol, it would be even worse if I had to borrow the money (an extra $4,660 at 10% over 5 years). At $2 per litre that amount of money will buy 8,500 litres of petrol; enough to drive my car 53,125 km around town (16l/100km) and I'd need to travel just over 95,500 km to recover this money by reduced fuel consumption. Even if petrol were $3 per litre we'd still looking at a pay back period of that can be measured in years.
I actually do about 14,000 km per year, mostly on motorways so applying the above calculation I'd save about 6.2 litres/100km. I'd have to travel 137,096 km at $2 per litre before I start to break even, nearly 10 years of motoring.
My calculations are quite simplistic and don't take account of inflation. My point is that just buying a car to reduce petrol consumption is actually an expensive thing to do. In my experience cheaper motoring is achieved by buying a good second hand car without borrowing money and keeping it for a long time. If you do the same calculations on a hybrid car you'd probably find it even more expensive, apparently the batteries have to be replaced every 3 years and it costs a lot more than filling your tank.
* This figure comes from a recent article on the opinion page in the Australian on 20/6/2008. The figure is 7,500km per capita per year. I'm assuming 2 adults per car.
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